Question

Bubs Corporation is planning to issue bonds with a face value of $506,500 and a coupon rate of 6 percent. The bonds mature in 15 years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

Compute the issue (sales) price on January 1 of this year for each of the following independent cases:

Case A: Market interest rate (annual): 8.5%

Case B: Market interest rate (annual): 4%

What are the issue prices for each case?

Answer 1

	A	B	C
1		Case A	Case B
2	Face value (It is the maturity amount to be repaid)	506500	506500
3	Coupon rate	6%	6%
4	Interest paid semi-annually	15195	15195
5	Number of semiannual periods	30	30
6	Market interest rate	8.5%	4%
7
8	Present value of interest paid semi-annually	$254,957	$340,314
9	Present value of maturity amount to be repaid	$145,311	$279,624
10	Issue price of the bonds	$400,268	$619,938

Above figures have been calculated in the following manner:

	Case A	Case B
Face value (It is the maturity amount to be repaid)	506500	506500
Coupon rate	0.06	0.06
Interest paid semi-annually	=B2*B3*(1/2)	=C2*C3*(1/2)
Number of semiannual periods	=15*2	=15*2
Market interest rate	0.085	0.04
Present value of interest paid semi-annually	=PV(B6/2,B5,-B4,0,0)	=PV(C6/2,C5,-C4,0,0)
Present value of maturity amount to be repaid	=PV(B6/2,B5,0,-B2,0)	=PV(C6/2,C5,0,-C2,0)
Issue price of the bonds	=B8+B9	=C8+C9